Derive Coffee is a coffee shop owned by Lumber Jackson, a coffee aficionado. Lumber employs Colin Steffes to manage the daily operations of the shop. Concerned with rising input costs and the inability to pass these costs along to customers, Lumber is focused on improving operational efficiency. To achieve this goal, Lumber promised Colin an all-expenses paid trip to Hawaii if the gross margin percentage for 2018 is maintained at or above the level of prior years, 25%. The original static budget for 2018 projected positive operating income so Lumber was concerned when the coffee shop showed an operating loss of $4,500 at the end of the year (see the sales volume and cost data shown below). For simplicity, assume there is no inventory related to coffee production (all that is purchased is used in production and sold). The total selling and administrative costs expected in the static budget was $45,000.

Lumber hopes to understand what changes drove the net loss given that a profit was expected for 2018. As part of this, Lumber analyzed the past year and found that the 27,000 higher sales volume was driven by two factors:

Colin increased spending on marketing (a component of selling and administrative expense) by $30,000 to generate more sales. Lumber estimates that this led to an increase in sales volume of 10,000 cups.

Colin switched to Fair Trade certified coffee for 2018 to appeal to a broader, more socially conscious market. Lumber believes that this change accounted for an increase in sales volume of 17,000 cups. The higher cost of Fair Trade coffee increased the expected variable cost of goods sold to $1.60 per cup. There were additional fixed costs of $20,000 to monitor and administer the Fair Trade coffee contract, and this $20,000 cost was accounted for in selling and administrative expenses.

Standards/Static Project

Sales and Production volume: # of cups of coffee - 108,000

Sales price per cup of coffee - $3.00

Variable production costs per cup of coffee - $1.50

Total Fixed Production Costs - $81,000.00

Actuals

Sales and Production volume: # of cups of coffee - 135,000

Sales price per cup of coffee - $3.00

Variable production costs per cup of coffee - $1.60

Total Fixed Production Costs - $81,000.00

1. Calculate the static budget variances for each of the following: Revenue, Cost of Goods Sold/Cost of Sales, Gross Margin, Selling and Administrative Expense, and Operating Income/Loss. Present the variances as absolute values and label them favorable or unfavorable. For this company, Operating Income/Loss = Revenue - Cost of Goods Sold/Cost of Sales - Selling and Administrative Expense. (Hint: you may have to "back into" the actual Selling and Administrative Expense.)